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Investing in commercial real estate (CRE) is a strategic move that offers significant financial benefits. However, commercial real estate lenders and investors need a structured approach to assess the risks and potential of a deal. The commercial real estate underwriting process ensures that lenders understand their customers’ creditworthiness before a major financial transaction begins. This process also guarantees the real value of a piece of property before it changes hands or is covered by an insurance program.
Credit union underwriters interested in mitigating their exposure to risks should master the underwriting process basics before getting involved with an expensive real estate transaction. From factoring in natural disasters to conducting a thorough background check on potential customers, these are the essential elements of the underwriting process to know.
Commercial real estate underwriting is the process of evaluating the financial viability, risks, and profitability of a real estate investment. It involves an in-depth analysis of the property, borrower’s creditworthiness, market conditions, and financial projections to determine the feasibility of the loan.
The process of underwriting dates back hundreds of years and has substantially evolved since its earliest days. Today’s commercial real estate underwriting process is most concerned with assessing the authentic value of a piece of property and the creditworthiness of those dealing with it. Underwriting ensures that a borrower seeking funds to purchase a vast tract of real estate has an established credit history and won’t default on their debts. It also helps insurers assess the property’s real value before deciding whether to offer its owner insurance coverage.
Mortgage underwriting must be thoroughly understood to master the commercial real estate underwriting process. Credit union underwriters who conduct mortgage underwriting are essentially approving or denying a real estate loan based on its riskiness, which is assessed by considering a variety of elements. The first such element is the loan recipient’s credit history.
The underwriting process begins when a borrower submits a loan application along with essential documents such as:
Business financial statements
Personal financial statements of guarantors
Tax returns (business and personal)
Rent rolls (if applicable)
Property appraisal reports
Business plan (for hospitality and owner-occupied properties)
Underwriters assess the commercial property’s value, condition, and revenue-generating potential. Key factors considered include:
Location and accessibility
Market demand and trends
Property condition and age
Comparable property values in the area
Occupancy rates and rental income trends
To determine whether the profitability of a loan is worth undertaking and the risks associated with dispensing it, credit union underwriters begin by assessing the financial history of a real estate buyer. In addition to reviewing a real estate buyer’s credit history, underwriters may also assess their industry experience and career path. Potential loan recipients with an established history in the commercial real estate market are considered more creditworthy than newcomers to the market.
Underwriters also determine the income of a buyer to ensure they can make loan payments. They may assess the collateral that a buyer can put up to secure a commercial real estate loan. Finally, they will make inquiries regarding the loan conditions; underwriters will seek to know if the loan is intended to finance a new real estate purchase or the buying of renovation equipment. The commercial real estate underwriting process will also entail an environmental risk assessment.
Credit union underwriters must consider the environmental risks associated with a piece of property before making loan or purchasing decisions. Natural disasters such as floods, hurricanes, or earthquakes can unexpectedly devastate the value of commercial real estate. Underwriters will thus determine the likelihood of a natural disaster before backing a loan.
Underwriters may consider shifting weather patterns, local infrastructure programs, and the vulnerability of a specific region to certain natural disasters based on historical data. According to a report on the impact of natural disasters on insurance markets, insurers develop a “sense of the average frequency of catastrophic events by state,” which may impact the underwriting process based on the real estate project’s location in question. Even buyers with established creditworthiness may struggle to secure a loan in an area prone to frequent environmental catastrophes.
A loan cannot be issued to a potential borrower until the precise value of a piece of real estate is known. Accurately assessing property value allows underwriters to determine the exact terms of a loan, how much collateral may need to be put up to secure a loan and the potential profitability of a loan. Properties with lackluster value compared to nearby real estate holdings may prove to be unworthy of investment. Alternatively, lackluster property values may simply lead to stricter loan terms for the borrower in question.
Underwriters may consider the rent growth forecast for the duration of their loan investment. They may assess the likelihood of tax rates changing in the aftermath of dispensing a loan. Underwriters will likely be concerned with the expected costs of improving a property to secure long-term profitability.
Mitigates Risk: Ensures that lenders invest in viable, low-risk projects.
Enhances Investment Confidence: Provides assurance to investors and stakeholders.
Ensures Regulatory Compliance: Adheres to financial regulations and lending standards.
Optimizes Loan Terms: Structures loans to suit both borrower and lender needs.
Underwriters and borrowers seeking to achieve their commercial real estate goals need qualified partners with a history of success. AVANA CUSO makes experts available to borrowers seeking to pass the underwriting process with flying colors. Additionally, it offers sound judgment to credit union partners by conducting thorough risk assessments that conform to regulatory requirements.
AVANA CUSO dependably determines the creditworthiness of borrowers and the value of real estate holdings with professional haste. Mitigate your exposure to risk by partnering with a proven loan leader like AVANA CUSO.